James West: Hi I’m James West. This is Midas Letter Money. My special guests today are Eric Sprott, Chairman of Sprott Inc. and Rick Rule, president Sprott USA. Gentlemen thank you for joining us today.

Rick Rule: Thank you.

Eric Sprott: Thank you.

James West: We happen to have an opportune moment to discuss the mess that the world is in. We’ve got Greece in a state of collapse more or less. We’ve got gold under attack. What’s going out there? Rick if you could maybe comment on the cause of the volatility right now.

Rick Rule: I think the cause of the volatility right now is probably a consequence of Western economies, people in western economies living beyond their means for 20 or 25 years and desperately attempting to continue to live beyond their means.

James West: Okay.

Rick Rule: There was a saying in the Southern States when I grew up that goes like, “When your outgo exceeds you income your upkeep becomes your downfall.” And I think we’ve come to that point in time in history. Now and people don’t want to live the consequences.

James West: Sure. So in your estimation then is this is a — have we gone beyond the point of no return with Greece? And is this going to catalyze a more general global crisis?

Rick Rule: I’m personally not particularly concerned with Greece because it’s such a small part of the world GDP. The nervousness that I have is that Greece is analogous to other somewhat larger economies like the US. And that from my point of view is problematic. You see strength in the US dollar strangely — it looks like the fact that the US dollar is the most liquid lie in the world makes it a preferable lie.

James West: Sure. So Eric to — as you’re precious metals investor of long record how do you see that playing out for the price of gold and silver?

Eric Sprott: Well, pretty well everything that’s happening and most of which by the way is not in any Economics 101 textbook. You know whether it’s a zero interest rate policy that tells the quantitative easings. The long term refinance operation, the unlimited swaps from G6 central banks, all of those things are telling us that the system is out of control. That people are losing confidence whether it’s in you know Greek banks or Icelandic banks or Portuguese banks and the sovereigns. So every day and almost now literally every week or two there’s some new program or some new meeting or something like to try to keep things together.

I would suggest they can’t be kept together. I use the same analogy that Rick does except I would call — what I call a Minsky moment who was an economist who said that when you keep expanding your economies by increasing debt, there comes a point where your economy can’t deal with the debt. And Greece of course is the poster shell today. It took on so much debt that everyone would realize you can’t deal with the debt. So we’re going to have to write it off. And that’s I’m sure is as Rick’s always said that’s the case in many countries, not just Greece.

James West: Okay. So for gold and silver is about bullish, bearish?

Eric Sprott: It’s very bullish. I mean I would love your listeners to think, “Well if you are in Greece what would you be doing today?” You’re a wealthy guy, you got your money in the bank, are you going to leave it there? I don’t think so. Would you — and there are only certain things you can do. You can buy some other currency or buy gold and I was harkened back to any country that’s had devaluation whether it’s Argentina, Iceland. If you had your money in gold you wouldn’t have taken the write off on the currency.

So I don’t know why more people haven’t gone to there. It will continue to be positive for precious metals.

James West: Okay Rick you sort of view the world through the eyes of a credit analyst. And so if we’re looking at the credit of the United States at this point, how would you feel about buying some of that debt?

Rick Rule: That’s a great question. You know if you assume that the government numbers are correct and we’re saving at about 3% of GDP that means we’re saving at about 3% of 14 trillion dollars a year or 500 billion dollars a year. You have 13 trillion dollars on balance sheet liabilities and about 65 trillion dollars on off balance sheet liabilities. So you’re trying to service — never pay down, 80 trillion dollars now in obligations with 500 billion dollars a year free cash flow. That doesn’t work.

I am in fact a credit analyst. And if people ask me to talk about the US Federal securities, and rate them the way a conventional credit analyst would — according to something resembling gap — they’re insolvent. I have no interest in lending those guys money. Now, they point to the fact that that they have extraordinary security. I’m a US citizen and taxpayer. What they’re referring to is me and the fact that I am the security for that is particularly uncomfortable.

James West: Uh-hmm.

Rick Rule: A, I don’t want to lend to them and on the other side I also don’t want to pay for those obligations myself which is — seems to be what they are intending for me to do.

James West: Uh-hmm. So how do you explain the global trend to view the US dollar as a –as a safe haven asset given that description to what you just gave us?

00:05:09

Rick Rule: Eric is probably better at that question than I am but from the point of view of a credit analyst, the only thing I can think of to say is that the US dollar is the most liquid lie in the world. The US Society is extremely competitive. And 30 years ago there were other countries that had mismanaged their economy to a greater degree than us and experienced more moral hazard. But as a consequence of our competitiveness we want to win every race, including the race to the bottom.

(Laughter)

As a consequence I guess of the historic strength of the US there is still faith in US society, the US economy and the US currency. And I suspect that you could say in the context of fiat currencies that the US dollar is the worst currency in the world except all the others. So if you compare the situation that the United States is in with as an example, example the situation of Europe perhaps we are better. That’s as opposed to good. My friend Doug Casey describes the US dollar as an I.O.U. nothing. And he says you contrast that with euro which is a “who owes you” nothing?

And I guess if that’s the discussion, that the US dollar is a fairly good lie. I personally believe that gold and silver are stores of wealth and mediums of exchange that simultaneously are assets and not somebody else’s liability. They’re not promises to pay which is what a currency is. They’re payment. And you reach a point in time when although they are inconvenient as mediums of exchange, you are willing to sacrifice ease for security. And I think we’re there.

James West: Historically, dollar bills were originally representative of gold being stored on behalf of the owner and so there’s a lot of discussion now suggesting that we need to return to a currency that is at least partially tied to the price of gold, so in essence and establishment of a gold standard and the critics say that’s just not possible. How do you respond to that? Eric?

Eric Sprott: Well, James I’ve always said that I think the markets already made a conclusion. The market has and not the central banks and not the governments. The markets already decided that gold is a reserve currency. It’s up by six times in 10 years. Every — against all currencies. It was interesting when Ron Paul in a hearing last week held up a silver ounce and said this silver ounce has maintained its value. I can buy six times as much today as I could buy back then. But the dollar has done the exact opposite. I tried a dollar versus this silver ounce, I — my purchasing power has gone down considerably whereas the silver has gone up.

So the markets have already made it the reserve currency. And I think it will go right back to dollar versus other currencies. And Rick’s hit right on, “The best thing for the dollar is you get to compare yourself to other currencies.” You know if everyday we said, “Well you know if came out and said, the dollar is down 500% versus gold in the last 12 years. What would everybody think? But we don’t express that way. It’s always, “It’s up versus the end or down versus this and they’re all these currencies that are depreciating together.”

James West: Sure. But do you see gold as a viable option as a standard sort of regulated into the monetary system to create some kind of reality as opposed to illusion that all the status has become?

Eric Sprott: Well, I think if you took all the currencies in the world the sum value. Now the sum value may have to be cut back because it’s not where you by any thing but I think you could make gold reserve currency if the price was $5,000 or $10,000 there would be enough gold in the world to back the currency but it’s just a matter of getting up to that price and you know we’ve gone a long way to getting there. I mean we were at 250 12 years ago. Today we’re at 1700. Lots of people expect as we north at 2000 before the end of this year. And you know you give it a few more years we might get to that value where it could replace currency depending on how much money they print. Unfortunately, the money printing is almost going faster than — it is going faster than the price of gold is going up.

James West: Sure. Okay. So I’m — and throughout my life I’ve noticed that we’re always talking about the price of the dollar versus the euro, the price of this versus that and always included in that is the price of everything versus an ounce of gold. And so is it not a true statement that gold had always been the standard by which other currencies are measured for 5000 years and is still in fact — is in fact the only gold standard?

Eric Sprott: Well it’s true that that’s been the case. Except very few people want to refer want to refer to it that way. I mean those of us in the gold community refer to it that way but you’re not going to have the central bank suggest that gold is a currency. In fact I think Chairman Bernanke was asked that. You know, “What is gold?”

00:10:01

And he gave some flippant answer that it certainly didn’t include it as a currency. But we know what has been. We know what we — with all the events going on in the world today. It will probably come back as a currency again.

James West: Okay. Now Rick you’re sort of renowned for being opportunistic and being where investors are not yet and thereby turning opportunities into profits. So given this environment, where is the opportunity now for investors to be — that is yet to deliver its value?

Rick Rule: I think there’s a reason, the large number of opportunities. One opportunity is a defensive opportunity which is to buy bullion. Buy gold, buy silver, buy platinum. I ask people not to think about buying them to make money but rather buy them to preserve purchasing power. And I think preserving purchasing power in the going forward basis is a wonderful opportunity. I think people need to concentrate on that first, so first things first. I think bullion is relatively attractive. I hope I don’t make a bunch of money on my bullion. Bullion traditionally has been catastrophe insurance. And I would prefer not to experience a catastrophe, but I feel better owning it.

The second thing is and this is lovely for me personally. The gold and silver equities have greatly underperformed the bullion. I was in the embarrassing position in 2010 to be way underway gold and silver equities because I thought they were expensive. The market took care of that which is very convenient. So we have a set of circumstances now where the institutional trade, the momentum trade is out of gold and silver equities and may be into the bullion. From my point of view the market has made the gold and silver equities relatively more attractive which is very nice from point of view.

I would say a third set of circumstances that I am attracted to are energy markets generally. I’m attracted to uranium because I think the utility of uranium is very high to users. I think worldwide energy consumption of all types is going up and worldwide supply of energy is in trouble. I think conventional oil or if you have a sense of humor for a contrarian activity and some patience natural gas are also attractive. I see really truly a plethora of opportunities in the resource sector. I would caution your listeners that these opportunities will take courage and patience because I think that we’re headed into a period of volatility in financial markets that’s absolutely unprecedented.

James West: Okay, so as an investor then you’ve got to learn to tune up the noise. Don’t look at the day to day fluctuations. You got to keep your eyes on the asset and stick with it. Is that what you’re suggesting?

Rick Rule: Yes. And I think you have to accustom yourself to volatility. You have to either use volatility or be used by volatility. Most speculators for some reason don’t mind the upside volatility.

James West: Uh-hmm.

Rick Rule: It reinforces their existing, you know sort of orientation. But they don’t like the downside part. Really what volatility is, is a sort of staccato, a series of 30% off sales. And if you’re looking to increase your exposure to an asset class and you have faith in the asset class, volatility should be a good thing. But it takes a lot of experience and a lot of discipline to put that into practice. Fortunately, being in the resource business for 30 years for better or for worse, I’ve experienced a lot of volatility. And for me it goes with the territory. But it’s more difficult for people who actually have a life.

James West: Okay. So Eric, where do you see the opportunities in terms of precious metals, explorers, mid-tier producers, large-cap producers, where’s the sweet spot for you?

Eric Sprott: Well, lately I’ve been leaning towards the silver sector. And the reason I lean towards the silver sector is I watch what people do with their money. And when I look at the US mints sales for example people are buying 50 times more silver in physical volume than gold. When we did the recent by issue by Solar Trust we raised 350 million roughly. When we did our Gold Trust we raised 330. We bought 50 times more silver than we did with gold in physical ounces. The availability of silver for investment vis-à-vis gold is about 7:1.

So we can’t have people continue to buy with these kinds of ratios and not have the price go up. And you know we’ve talked before about the — what goes on the silver market which I find rather disturbing that the price plunges all of a sudden because all these papers silver coat for sale. And I focused on the physical part and if the physical demand stays there — if for example some of these silver producers decide to keep their cash rather than having cash and having silver I think big things can happen to silver going forward. So the big bullions on silver, the bullion and big bullion on silver stocks.

James West: Okay. Well gentlemen that’s an interesting conversation as usual. I’d like to thank you for joining us today.

Rick Rule: Pleasure.

Eric Sprott: Pleasure.

James West: If you’d like to learn more about the Sprott Group of Companies visit Sprott.com and if you’d like to learn more about companies like Sprott, visit MidasLetter.com. I’m James West and this is Midas Letter Money.

James West is the founder of Midas Letter Financial Group Ltd., a financial publisher and institutional investment advisory consultancy, as well as the host of Midas Letter Money, a Reuters Insider platform-delivered HD show that features guests from the world of Canadian public companies and resource exploration firms, as well as the companies who finance them.